China is moving forward with plans to issue its first sovereign bonds in dollars since 2004 in a deal that will put a symbolic seal of approval on the booming offshore Asian debt market.
The Ministry of Finance was scheduled to meet with bankers in Beijing Wednesday to discuss the sale, according to people familiar with the plans. The deal is aimed for as soon as this month, according to the people, who asked not to be named as the specifics aren’t public. The MOF said in a statement it will sell $2 billion worth of notes.
While China’s government doesn’t need to borrow offshore, with a domestic debt market that’s now the world’s third-largest, its bonds will provide a new benchmark for pricing the country’s state-owned enterprises. A successful deal will pull down those borrowing costs, and may fuel further sales after what’s been record issuance so far this year.
China’s investors have been eager to snap up dollar securities, and with the country’s borrowers obliging, the Asian dollar-bond market is effectively being transformed into a Chinese operation. Within as few as three years, some 80% of the Asian market outside Japan is likely to be Chinese, according to Goldman Sachs Asset Management. By then, its size will have surpassed $1 trillion, strategists predict.
News on the plans comes little more than a week before a pivotal Communist Party leadership gathering, and underlines the government’s confidence there will be strong demand despite China’s two sovereign-rating downgrades this year. S&P Global Ratings cut China’s credit rating by one notch, following on from Moody’s Investors Service, which did the same thing in May.
“It will certainly have scarcity value and I imagine it will be snapped up pretty quickly,” Geoff Lewis, Hong Kong-based senior strategist for Asia at Manulife Asset Management, said of China’s sovereign bonds in an interview with Bloomberg Television. “It’s a clear sign of China’s determination to move into the international financial markets” and play a role “commensurate with the size of its economy.”
China’s MOF said Wednesday that it will sell $1 billion of five-year notes and the same amount of 10-year debt “soon.” Most Asian dollar bonds nowadays are sold outside the U.S. and China hasn’t specified which rules will govern its sovereign issue, though the MOF did say the bonds will be listed on the Hong Kong Stock Exchange.
When Postal Savings Bank of China Co. sold $7.25 billion worth of dollar debt last month, only 3% went to non-Asians. That deal was the biggest since a jumbo sale by Alibaba Group Holding Ltd. in 2014.
Anticipation of strong appetite for China’s new issue had already started reducing the premiums for Chinese issuers, strategists said last month. As for the sovereign bonds themselves, South Korea’s offshore government debt is a key point of comparison, and tighter pricing than its Asian neighbor’s securities would be a further feather in China’s cap.
South Korean dollar bonds due in September 2023, currently the closest to a five-year note, yield about 84 basis points over U.S. Treasuries, according to data compiled by Bloomberg. The country, which has a rating two steps above China’s, has notes due in January 2027 that trade 78 basis points over comparable Treasuries.
“We expect the small $2 billion issuance of five-year and 10-year China sovereign issuance will quickly become a collector’s item, with a flat curve,” said Owen Gallimore, Singapore-based head of credit strategy at Australia & New Zealand Banking Group Ltd. “Initially the market will price at a discount to intra-regional peers such as Korea.”
While both Moody’s and S&P flagged concerns over China’s continuing buildup of debt in their sovereign downgrades this year, there’s been little impact on the bond market. Most of the debt is at the corporate and local-authority level, and both have participated in the record dollar issuance this year. Junk-rated property developers have been another notable source of supply.
With the growth of the Chinese offshore bond market, the country’s lenders have become increasingly competitive in the underwriting leagues. Six of the 10 banks represented at the Beijing meeting Wednesday on the sovereign sale were Chinese, according to people familiar with the discussions. Citigroup, Deutsche Bank, HSBC Holdings and Standard Chartered were the four international firms represented, according to the people.
Agricultural Bank of China, Bank of China, Bank of Communications Co, China Construction Bank Corp., Industrial & Commercial Bank of China — all state-owned lenders — and China International Capital Corp. were the six Chinese groups at the gathering, the people said.